Outlook for worldwide LNG markets: economic and international factors

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Floating Storage and Regasification Units (FSRU)

While the main LNG demand centers like Japan and China still rely on fixed import terminals, which generally take years to build with capital costs running into the billions of dollars, the infrastructure needed to dock an FSRU can normally be put in place in a matter of months. Vessels can be built for about $300m or existing LNG tankers can be converted to give them regasification abilities, with companies such as Texas-based Excelerate Energy and Norway’s Höegh LNG focusing on the sector. In recent years FSRUs already allowed Argentina, Egypt, Pakistan and other countries to quickly become major importers of the fuel, diversifying away from other sources or — in the case of Lithuania — reducing its reliance on monopoly suppliers like Russia. According to Wood Mackenzie, FSRU imports have more than doubled in the past two years and now account for as much as 15 per cent of the more than 244.8 MTPA of LNG supplied annually, with both numbers set to rise. Traders and analysts say the key to this is utilizing FSRU vessels to provide greater flexibility. Producers and traders are also prepared to work more closely with countries that may not have been deemed suitable prospects for financing an onshore import terminal, due to either lack of funds or instability. Some in the industry remain cautious about the transformative role of FSRUs. While they concede regasification ships are a growing part of the market they warn that not all developing markets have suitable ports with power plants nearby, or gas grids to carry the fuel inland[9].

Global LNG Shipping

New locks in recently expanded the Panama Canal will allow access to 90 percent of the world’s LNG tanker fleet, up from 6 percent before the waterway’s expansion. As of January 2016, the global LNG shipping fleet consisted of 410 vessels, with a total capacity of 60 mmcm. 28 LNG vessels were delivered in 2015 far outweighing the shipping requirements from the additional 4.7 MT of incremental LNG trade, exacerbating the oversupply in the LNG shipping market and leading charter rates to fall 49% between January and December 2015[10].

Overcoming Capital Constraints Challenges

Ensuring that new projects have the prospect of generating a reasonable return on the investment is a key challenge in a lower price environment than that in which FID was taken on the majority of the projects now under construction. The capital cost of these projects will, therefore, be a critical factor in their economic viability. In order to launch its LNG export business and to help support initial construction of its Sabine Pass liquefaction facility, Cheniere Energy, Inc. signed a 20-year agreement to deliver LNG to Gas Natural Fenosa, the largest integrated energy provider in Spain and Latin America. GAS NATURAL FENOSA contract represents a supply of almost 5 bcm/year of LNG from the Sabine Pass plant (Louisiana), making it the second company in the world to agree on the purchase of natural gas from the United States since the country announced it was going to start exporting this fuel. In addition to this contract, GAS NATURAL FENOSA has signed supply contracts in the last two years for a total of 10 bcm/year, a figure representing approximately 30% of Spanish consumption (28 bcm in 2013) and the power company’s current portfolio (30 bcm). The multinational Spanish power company is currently a benchmark LNG/NG operator in the Atlantic and Mediterranean basin[11].

Capital constraints are in part behind a decision to delay a final investment decision for a gas export and import facilities. Organizations in the LNG sector are using joint ventures (JV) as a key component of most major company portfolios and are seen as the solution to a number of corporate development challenges. The oil and gas industry is a prime example of the growth of JV arrangements, where an EY[12] study of 49 megaprojects showed as much as 55% of investment is spent through alliance or JV relationships. The participants in these relationships (as in other industries) contribute assets, capital, unique expertise or labor to access diverse advantages such as scale, risk sharing, market entry, optionality, tax benefits and access to others’ unique capabilities. Queensland Curtis LNG (a joint venture of QGC - now a Shell-owned business, China National Offshore Oil Corporation and Tokyo Gas), Australia Pacific LNG (a joint venture of ConocoPhillips, Origin and Sinopec), and Santos GLNG (a joint venture of Santos, Petronas, Total, and Kogas) each hired Bechtel to design and build liquefied natural gas facilities side by side on Curtis Island, off the shore of Queensland, just north of the city of Gladstone. The three facilities, including a total of six trains, are now complete and can produce more than 25 MPTA of LNG, accounting for roughly 8% of global LNG production. These three simultaneous construction programs are part of the largest concentration of private-capital investment in Australia’s history[13].

Conclusion

In the longer term, as shale gas becomes more widespread outside America, some countries will no longer need to import LNG, freeing up more supplies for the spot market. Shale gas revolution is driving a dramatic restructuring of global natural gas markets increasing gas supplies, rising demand and bringing down prices. Current oversupply and lessened economic growth will lead in two to four years to more oversupply of LNG in the world and the producers will become more aggressive to take new markets in “take or pay” and spot and without a doubt achieve better pricing than the past decade. As gas sellers begin to lose their monopoly in the natural gas market contracts, the Asia-Pacific region will continue to be less linked to oil, particularly the Japan Crude Cocktail and Brent oil price indices. With the evolution of the LNG spot market, the natural gas market has become more competitive and reduced the need for collaterals. Additionally, emerging markets will play an increasing role in development of a new spot price closer to Henry Hub as the number of importers of LNG is growing steadily with the emergence of Jordan, Pakistan, Poland and Egypt taking in LNG cargos. Malaysia, Singapore, Thailand and Pakistan have emerged as the newest players on the importing playing field. They currently account for a small share of the total Asian LNG imports, however, as a combined force, including the remainder of the newest markets, they have the potential to increase their import levels and therefore seek lower prices that were more reflective of the natural gas market with spot prices closer to Henry Hub.

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